How is borrowing capacity calculated

Borrowing capacity refers to the maximum amount of money a lender will allow you to borrow to buy a home. This is determined based on a range of factors, including your income, expenses, living expenses, and assessment rates. In this post, we’ll take a closer look at each of these factors and how they impact your borrowing capacity.

Your income is a key factor in determining your borrowing capacity. Lenders will typically assess your ability to repay the loan based on your income, looking at your salary, wages, bonuses, and any other regular income you receive. If you’re self-employed, lenders may also consider your tax returns and other financial documents to verify your income.

Your expenses also play a significant role in determining your borrowing capacity. Lenders will look at your existing debts, such as credit cards, car loans, and personal loans, to assess your ability to manage repayments. They may also consider any ongoing expenses, such as school fees or child support payments.

Living expenses are another factor that lenders will take into account. This includes your day-to-day expenses, such as groceries, utilities, transport, and entertainment. Lenders will typically use a benchmark figure to estimate your living expenses, based on your family size, location, and other factors.

Finally, assessment rates are used by lenders to ensure that you can still afford your loan if interest rates rise in the future. Lenders will typically use a higher interest rate than the actual rate you’ll be paying to calculate your borrowing capacity. This is to ensure that you can still afford your repayments if interest rates rise.

In summary, your borrowing capacity is determined based on a range of factors, including your income, expenses, living expenses, and assessment rates. To maximise your borrowing capacity, it’s important to keep your expenses under control, maintain a good credit history, and provide accurate information to your lender. Working with a mortgage broker can also help you navigate the lending landscape and find the right home loan product that meets your needs and borrowing capacity.